Find out the possible advantages and disadvantages of an owner-financing arrangement for both the home seller and potential buyer.
If you’re considering entering into an owner-financing arrangement for either the sale or purchase of a home, you need to do some research. Owner financing becomes more popular during slow markets, but still only represents a small fraction of all sales. This is due to a number of reasons: seller and buyers may not understand how owner financing works, are worried about entering into a financial agreement with a complete stranger, or haven’t researched how the arrangement might benefit them.
While owner financing can offer a number of benefits, there can be negatives as well. There are ways a seller can reduce their financial risk, but both buyers and sellers need to weigh the pros and the cons before entering into an owner-financing arrangement.
What are the advantages of owner financing?
Owner-financing arrangements offer a number of advantages for both sellers and buyers.
Sellers may have the advantage of:
- receiving a higher-than-average price or interest rate, due to the buyer’s inability to obtain traditional financing,
- receiving a tax advantage, thanks to the nature of owner financing where capital gains from the sale are spread out over time, and
- a shorter closing period.
Buyers may have the advantage of:
- obtaining more flexible credit requirements and loan terms (this can be especially advantageous if the buyer has poor credit or can’t prove income due to self-employment or a new job),
- rebuilding their credit thanks to the regular monthly payments made to the seller,
- paying a smaller down payment than what might be required with a traditional loan,
- paying fewer closing costs, which could potentially save the buyer thousands of dollars, and
- getting into the home faster by avoiding a lengthy loan process.
And both the seller and buyer benefit by having an alternative to close a deal that might not have been possible with traditional financing.
What are the disadvantages of owner financing?
While the pros of owner financing might sounds great, there are some cons as well.
For the home seller, possible disadvantages of extending financing to a buyer include:
- taking on the role of determining the best loan terms, which can be difficult if you’re not familiar with the financial industry,
- deferring when total funds from the home sale will be received (owner-financing arrangements can be comparable to rental agreements), and
- assuming the risk of the buyer defaulting on the loan.
There are possible disadvantages in an owner-financing arrangement for the potential buyer as well, such as:
- paying a higher sales price or interest rate than what might be obtained with a traditional mortgage, and
- the need to refinance the loan at the end of the term to pay off the balance, which means that the buyer will need to be able to qualify for a refinance at that time.
This article contains general information. Individual situations are unique; please, consult your financial advisor or attorney before utilizing any of the information contained in this article.
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